The Auditor-General’s Report and Debt Management: Anwar vs Najib

Political Studies for Change (KPRU – Kajian Politik untuk Perubahan), a local research institute as well as a political think tank.

25 October 2011

Persistent fiscal deficits! That’s the best description of the Federal Government’s fiscal position which had been governed by Barisan Nasional (BN) over past few decades except a brief period of federal budget surplus from 1993 to 1997 when Anwar Ibrahim was the Finance Minister. This year’s much-delayed Auditor-General’s Report again revealed wasteful spending by government departments as well as weaknesses of governance which have contributed to the Federal Government’s embedded deficit and debt problems. The report’s specific remark on rising trend of public debt which is approaching alarming level is a serious issue. Due attention shall be given to the questionable debt management capability by the BN Government.

Fiscal deficit is not always bad. However, persistent fiscal deficits even when economy is growing – meaning there’s a serious lack of fiscal discipline – would weaken a government’s position to meet its debt obligation later on, especially in time of recession. And when this happens, that means the future generation will be burdened with ballooning public debt.

Mathematically, drafting a national budget very much depends on a country’s economic growth projection over next year and thus its nominal value of Gross Domestic Product (GDP). A robust growth will mean higher GDP and higher revenue as tax and other revenues go up. That will provide a smaller value of budget deficit forecast and of course a smaller percentage of public debt.

However, when economic growth projection is over-optimistic or when economy is slowing down, that will mean smaller-than-anticipated tax and other revenues, hence, the actual nominal value of GDP is smaller, driving the shortfall higher. That will provide a bigger value of budget deficit and thus a higher percentage of public debt.

The world economy is on a downward spiral. As one of the most open economies and very dependent on international trade, various growth projection of Malaysia for next year is significantly lower despite Prime Minister Najib Razak’s over-optimistic growth forecast of 5.0 to 6.0 percent and budget deficit forecast of 4.7 percent for 2012 in his proposed RM232.833 billion Budget 2012 tabled on the 7th of October, 2012.

Most research houses have lowered their 2012 growth projections for Malaysia despite Najib’s optimism in his 2012 Budget proposals, which critics have said is primed for the imminent 13th General Election. Against this background, the Malaysian Institute of Economic Research (MIER) downgrades 2011 GDP growth rate to 4.6 percent year-on-year. For 2012, MIER revises the GDP growth forecast to 5.0 percent.[1] According to the RHB Research Institute, Malaysia’s economic growth could slow to just 3.6 percent next year from a projected 4.3 percent this year due to the increasing risk of a double dip global recession.

Given the projections and path we are currently on, that means even higher deficits than we have now. Worse than the worst, if we go into a recession, we will see record-level deficits and public debts. By that time, as the government’s debt obligations are mathematically impossible to resolve, the rakyat will then wake up one morning to the reality that they are a lot poorer than they thought.

According to the 2010 Auditor-General’s Report released on 24 October 2011, Malaysia’s public debt rose by 12.3 percent or RM44.72 billion to RM407.11 billion last year compared to RM362.39 billion in 2009. The Auditor-General said in the report that the government owed 53.1 percent of GDP, slightly down from 53.3 per cent last year. That’s the second consecutive year the Federal Government debt to GDP ratio surpassing the 50 percent level.

By referring to the following chart provided in the 2010 Auditor-General’s Report, public debt from domestic sources rose by RM41.76 billion to RM390.36 billion while external debt rose to RM16.75 billion, up RM2.96 billion.

Sources: 2010 Auditor General’s Report.

It is in this context that I shall try to argue that, fiscal discipline and prudent debt management of the government of the day should be taken seriously as the most basic and important elements of good governance. In the following chart, Federal Government deficits figure compiled by a local research institute as well as a political think tank Political Studies for Change (KPRU – Kajian Politik untuk Perubahan) has shown that, there’s a serious lack of fiscal discipline in the Federal Government under the administration of then Finance Minister Mahathir Mohamad, later Abdullah Ahmad Badawi and now Najib Razak.

It is worth noting that the country has been in deficit for 14 consecutive years, and this is set to continue in 2012. This trend started in 1998 in the aftermath of the Asian financial crisis, which coincided with the sacking of Anwar, the Finance Minister and Deputy Prime Minister at that time.

In fact, ever since Anwar was appointed Deputy Prime Minister in 1993, the country’s budget had been in surplus every year until his sacking. After being appointed Finance Minister in 1991, Anwar turned the budget deficit into surplus in two years’ time, which was no mean feat as the country’s account had been in deficit for more than 20 years before his helming of the treasury[2].

A brief period of surplus was recorded and they were 0.2 percent in year 1993, 2.3 percent in year 1994, 0.8 percent in year 1995, 0.7 percent in year 1996 and 2.4 percent in year 1997. In contrast, current government under the administration of Najib has run on budget-deficits with increasing Federal Government debts.

When one takes a deeper look into the numbers, one has to say that Anwar’s record as Finance Minister is indeed impressive. Total Federal Government debt actually decreased from 1992 until 1996 after more than 20 years of consecutive increases[8]. The total Federal Government debt level had also been kept between RM89 billion to RM100 billion from 1991 to 1997.

In the Anwar era, besides a 4.6 percent increase in Federal Government debt in his first year as Finance Minister, and a 0.3 percent surge and 14.7 percent surge in 1997 and 1998 respectively when the country was badly hit by the economic crisis, the debt level had been decreasing at a stable rate of 1 to 3 percent every year. In contrast, total Federal Government debt had been increasing rapidly at a rate of more than 10 percent every year since Najib became Finance Minister in 2008.

To make things worse, the BN Government has a tendency to approve supplementary budgets in dealing with over-spending one after another, quite often without valid ground. The basic principle to table a supplementary supply bill is when unexpected expenditure takes place especially when a country is in a crisis like the earthquake and nuclear disaster in Japan.

However, having been criticized for over-spending and persistent budget deficits, the BN Government has manipulated the supplementary budget as a political tool to hide escalating deficit and debt figures during annual announcement of the National Budget rather than as an avenue in dealing with unexpected spending. For example, in the latest Supplementary Supply (2011) Bill 2011 tabled in June this year, the Najib administration had been criticized for manipulating RM1 billion of allocation for emolument of Health Ministry as emolument shouldn’t fall under unexpected spending. That’s also one main reason why initial forecast of deficit figure announced during annual budget session used to be lower than the actual one.

The following tables compiled by KPRU have shown that, the BN Government has tabled two supplementary supply bills outside the 2009 National Budget, another two supplementary supply bills outside the 2012 National Budget and up until today, one supplementary supply bill outside the 2011 National Budget. Although the 2012 National Budget has just been tabled, past records show that the BN Government could table another supplementary supply bill outside the 2011 National Budget during current parliament session or in year 2002.

KPRU STATISTIC: ACTUAL ALLOCATION FOR YEAR 2011 NATIONAL SPENDING (UP-TO-DATE)

Allocation

(RM million)

2011 National Budget

1st Supplementary Supply Bill

2011 Overall Budget

Operating Expenditure

162,805

13,187

175,992

Development Expenditure

51,182

n.a.

51,182

Total

213,987

13,187

227,174

Source: Supply Bill and Supplementary Supply Bill.

KPRU STATISTIC: ACTUAL ALLOCATION FOR YEAR 2010 NATIONAL SPENDING

Allocation

(RM million)

2010 National Budget

1st Supplementary Supply Bill

2nd Supplementary Supply Bill

2010 Overall Budget

Operating Expenditure

138,279

9,265

13,271

160,815

Development Expenditure

53,220

2,812

1,947

57,979

Total

191,499

12,077

15,218

218,794

Source: Supply Bill and Supplementary Supply Bill.

KPRU STATISTIC: ACTUAL ALLOCATION FOR YEAR 2009 NATIONAL SPENDING

Allocation

(RM million)

2009 National Budget

1st Supplementary Supply Bill

2nd Supplementary Supply Bill

2009 Overall Budget

Operating Expenditure

154,170

5,000

8,972

168,142

Development Expenditure

53,729

5,000

2,388

61,117

Total

207,899

10,000

11,360

229,259

Source: Supply Bill and Supplementary Supply Bill.

On the 7th of October, 2011, in a politically staged event of utmost importance to his own survival as well as UMNO-BN, Najib gave a positive prognosis of the Malaysian economy by proudly claiming a projected 5.0 to 5.5 percent growth rate for 2011, and then unrealistically projecting a 5.0 to 6.0 percent growth rate for 2012. On top of that, Najib also touted a reduction of the federal fiscal deficit to 4.7 percent of the GDP in 2012 from 5.4 percent in 2011[9].

Missing from his speech was any mention of our national, external, or total Federal Government debt. In fact, the last time any of this was mentioned in a budget speech was two years ago in 2009, when Najib conceded that the rate of our national debt was getting higher and higher[10]. 2009 was also the year in which the total Federal Government debt recorded a marked increase to 53.3 percent of the GDP from 41.3 percent the year before. The Federal Government debt to GDP ratio had maintained at rate of around 53 percent to 54 percent since then, with the 2011 figure projected at 53.8 percent[11].

According to Bank Negara Malaysia’s latest report, as of 30 June 2011, Federal Government debt stood at RM437 billion, with domestic debt amounting to RM421 billion and foreign debt at RM16 billion. According to the 2010 Federal Government Financial Statements prepared by the Accountant General of Malaysia, for the year 2010, total Federal Government debt increased by 12 percent to RM407.101 billion as against RM362.386 billion in 2009. Borrowings increased by RM45.062 billion or 13 percent to RM399.711 billion from RM354.649 billion in 2009.

Reacting to the latest debt figures, Parliamentary Opposition Leader Dato’ Seri Anwar Ibrahim warned that Malaysia was on course to breach the public debt limit due to the Federal Government’s failure to resuscitate the country’s under-performing economy[12].

Based on the Government Funding Act 1983 and Loan (Local) Act 1959, currently, the ceiling under both Acts is not more than 55 percent of total GDP. In addition, external loans are obtained with limits of borrowing based on the External Loans Act 1963. Currently, the ceiling under the Act is RM35 billion.

Viewing the situation from another perspective, we turn to the work of Carmen Reinhart and Ken Rogoff entitled ‘This Time Is Different: Eight Centuries of Financial Folly’. They studied the factors contributing to 29 past sovereign defaults and found that default or debt restructuring occurred, on average, when external debt reached 73 percent of Gross National Product (GNP).

Based on the above chart compiled by KPRU, total Federal Government debt was RM99.073 billion in 1991, the year Anwar became Finance Minister. It dropped to RM97.005 billion in 1992, RM95.898 billion in 1993, RM93.078 billion in 1994, RM91.369 billion in 1995, and RM89.681 billion in 1996, before it rose minimally to RM89.920 billion in 1997, and more significantly to RM103.121 billion in 1998.

Total Federal Government debt was RM306.437 billion in 2008 when Najib took over as Finance Minister. It rose to RM362.387 billion in 2009 and RM407.101 billion in 2010. It was projected to hit RM455.745 billion in 2011. According to Bank Negara Malaysia’s latest report, as of 30 June 2011, Federal Government debt already hit RM437 billion.

Based on the above chart compiled by KPRU, the reasonably well managed debt levels during Anwar’s time as Finance Minister can be attributed to sound management of the domestic debt. Anwar had managed to keep the domestic debt level below RM80 billion until 1997 until it hit RM88.197 billion in 1998.

In the seven-year period from 1991 to 1998, domestic debt rose by a total of RM14.542 billion or 19.7 percent, with the bulk of it coming from the period of 1997 to 1998. From 2008 to 2011, in a short span of three years, domestic debt rose by a total of RM152.346 billion or 53.2 percent. This shows that the domestic debt level rose sharply since Najib took over as Finance Minister until now.

In fact, Najib’s debt management seems to be worse than his predecessor, Abdullah Ahmad Badawi’s. Based on the above chart compiled by KPRU, the total Federal Government debt grew 5.6 percent and 5.9 percent in 2005 and 2006 respectively, and they were the smallest since an 8.7 percent increase was recorded in 1999.

Based on the above chart compiled by KPRU, the period in which Anwar was at the helm of the Treasury also saw a remarkable decrease in the Federal Government debt to GDP ratio, from 73.3 percent in 1991 to 31.9 percent in 1997. In contrast, Najib’s helm of the same office was marked by an increase of more than 10% in the Federal Government debt to GDP ratio from 2008 to 2009.

The numbers do show that Anwar is a more prudent and effective manager of the economy as compared to Najib. Najib can point to the weakness of the global economy time and time again, but the increase in spending, and more specifically, extravagant spending in the wrong areas and money-corrupted governance seems to be the reason for our continuing high debt level.

How much public money has been lost through corruption? How much of it has been used to subsidise big corporations instead of the people? How much of it has been used to pay for ‘commission’ for big business deals involving the government? We may never know how much, but we do know that it is one hell of an amount.

A corrupt governments’ moral or legal right to bind future generations of citizens to repay foreign creditors is questionable. The problem is that this is the beginning of a string of crises and not the end. It’s time that a government practicing good governance vis-à-vis debt management is being put in place so as to safeguard a better tomorrow for future generation of Malaysia.

Excellent presentation of data and charts to show up the reckless and irresponsible financial management of Najib as opposed to the prudent management of the nation’s finance under Anwar when he was in power. These facts should be reproduced in pamphlets in more simplified and eye-catching form in several languages to be distributed to the man-in-the-street nation-wide.